Revenue Recognition}

Katie Vote owns a small business that rents computers to students at the local university for the nine-month school year. Katie's typical rental contract requires the student to pay the year's rent of \(\$ 900\) ( \(\$ 100\) per month) in advance. When Katie prepares financial statements at the end of December, her accountant requires that Katie spread the \(\$ 900\) over the nine months that a computer is rented. Therefore, Katie can recognize only \(\$ 400\) revenue (four months) from each computer rental contract in the year the cash is collected and must defer recognition of the remaining \(\$ 500\) (five months) to next year. Katie argues that getting students to agree to rent the computer is the most difficult part of the activity so she ought to be able to recognize all \(\$ 900\) as revenue when the cash is received from a student.

\section*{Required:}

CONCEPTUAL CONNECTION Explain why IFRS requires the use of accrual accounting rather than cash-basis accounting for the above, and similar, transactions.

\section*{OBJECTIVE 1 (2) 4}

Problem